PMO, Jaitley push clears path for big private role in defence production

The defence ministry seems to have unlocked the strategic partnership (SP) logjam with a firm push from the Prime Minister’s Office and sustained focus by defence minister Arun Jaitley, setting up the private sector to play a major role in the production of weapons systems for the armed forces.

A tussle within the bureaucracy over what rules the SP model would follow had resulted in a stalemate within the ministry since February 2016, frustrating leading private sector companies that were expecting to get mega production orders for aircraft, submarines and land systems, a traditional stronghold of the public sector.

Sources have told ET that a series of meetings, particularly one held in the PMO last week, have given the last-mile push to the initiative.

Top private sector representatives from three industrial bodies have now been invited by the defence ministry for a meeting on Thursday, where the government is expected to unveil progress made.

It is expected that four projects will be taken up in the first phase of the strategic partnership project — new submarines, a naval utility helicopter, a single-engine fighter aircraft for the air force and armoured vehicles for the army. The armed forces, the navy in particular, are keen to move fast on the concept to meet urgent requirements and address the equipment deficit.

“There is no doubt that involving the private sector in this way is the best way forward. Most of the issues have been resolved and the initiative needs to be started on a ‘yesterday’ basis — there is no time to be lost,” a senior armed forces officer involved in the discussions on the matter told ET.

Contentious issues, including objections from a certain section of the bureaucracy on how to ensure competitiveness after choosing a certain private sector player as a strategic partner for a specific role like, say, shipbuilding, has resulted in rules not being framed, despite the policy being announced as an integral part of India’s defence procurement policy since early last year.

Officials said a middle ground has been found on most issues, the driving force being specific directions from the PMO that the private sector needs to get a significant chunk of military orders, given that the current model being followed, to push most orders to the public sector, has not been yielding the desired results.

“There are ways to resolve issues. The objection on the longterm covenant for example cannot hold as anyone making a system like submarines or fighter jets will have to be involved for a 20-25-year lifetime of the product,” a senior government official said.

Though initially a divided house on modalities of the SP model, the private sector too is now on board with the government’s new push. Several industry leaders that ET spoke with said on condition of anonymity that the principle was always accepted but now issues like the selection process and division of work have been resolved.

A formal selection process is yet to begin but internal deliberations indicate that six major Indian companies interested in the sector will be able to qualify on financial grounds to be chosen for the strategic partnership model. This includes the relevant units of Larsen & Toubro, Tata, Mahindra & Mahindra, Reliance Defence, Bharat Forge and the Adani Group. Projects worth several billion dollars are expected to be unlocked for the private sector, analysts said.

“Through SP policy, programmes estimated to be in excess of $20 billion will open up and an attempt will be made to bring the private sector on par with DPSUs (defence public sector units) in terms of opportunity,” said Ankur Gupta, vice-president, EY India. “Post policy rollout, the private sector has to make necessary investments to leverage this bold government initiative and deliver on the large-ticket programmes.”

As per the current plan, only one company will be allowed to undertake one strategic project and would not qualify to compete for others. This has thrown up a unique challenge for companies such as Tata and L&T that have diversified interests in the field.

Tata, for example, could want to compete for the armoured vehicles project through its Tata Motors subsidiary and for the naval helicopter contract through Tata Advanced Systems (TASL). More clarity is expected on the matter at Tuesday’s meeting.

 

By: ET

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